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Tuesday, August 11, 2009

CREDIT SCORES

Whether we like it or not, our lives are greatly impacted by our financial credit scores. If you have a good credit rating, lending institutions are more than happy to loan you the money to buy a house, a boat, a car, help you start a business venture, or whatever. If you have a bad rating, you're basically stuck in Nowheresville.

For our younger readers, your credit score begins the day you get a revolving line of credit, such as a credit card or gasoline card, or purchase something on time, such as a house, furniture, or whatever. Your ability to pay off debt is monitored and scored from this point to the day you finally die (and pass your financial troubles to your heirs). In other words, it is an albatross hanging around all of our necks.

Interestingly, most consumers pay little attention to their credit scores which are ultimately maintained by three major credit bureaus: Experian, TransUnion, and Equifax. A lot of people seem to prefer operating in the dark. I guess ignorance is bliss. To the rest of us, it's a wise move to periodically look over your credit report and make sure it is an accurate accounting of your credit history. If it is wrong, it could do considerable damage to your reputation from a financial perspective.

Your credit score is primarily a reflection of your ability to pay your debt. Period. Remarkably, your income is of little concern in this regards. Just because you make a lot of money, it doesn't necessarily mean you will use it to pay off your debt. Instead, they carefully monitor your credit cards and loans. In particular, they analyze the amount of credit available to you, your outstanding balance, and if you are paying it off on time. Late payments are flagged accordingly. From this, they calculate a credit score which lending institutions use to pass judgment on you. Having a good credit score, therefore, is a sign you are able to manage your finances responsibly. It should be noted that gender, race, and religion are not considered when determining scores.

Although the credit report is available free to you once a year, the credit score must be purchased separately for a modest fee. Perhaps the best place to begin to study your credit profile is at the web site, Annual Credit Report, a free service to guide you through requesting a credit check.

We all understand what is necessary to raise credit scores; in a nutshell, don't bite off more than you can chew, and pay it off on time. However, knowing this and having the discipline to implement it are two different things, as evidenced by our current recession which was started, in large part, by people defaulting on home loans (and don't get me started on the idiots who loaned them the money in the first place).

At the time of this writing, the Experian credit bureau reported that America's "National Score Index" was 692 which, by my estimate, is a "Good" credit rating ("B"). This is either an overly generous estimate or perhaps Experian is telling us our economy is not as bad as we thought and is indicative of a healthy rebound. I suspect the latter as their numbers are based on fact, not speculation.

If anything, this recession has taught us the virtue of paying attention to credit ratings, both for the consumer and for lending institutions. Like it or not, it is how we quantify an individual's financial responsibility. Regardless of your credit score though, always remember this: The less money you have, the less likely you will get a loan. Conversely, if you already have a lot of money, you'll get all the cash and credit you want. Sorry, that's just the way it is. I don't make the rules, I just report them.

Such is my Pet Peeve of the Week.

Keep the Faith!

(A tip of the hat to T.D.P. for the topic suggestion)

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